Coralville, IA GO Rating Lowered To 'BB+', Appropriation Debt Rating Lowered To 'BB' On Increased Debt Burden

CHICAGO (S&P Global Ratings) Dec. 20, 2018--S&P Global Ratings lowered its 
rating to 'BB+' from 'BBB+' on Coralville, Iowa's outstanding general 
obligation (GO) bonds. At the same time, S&P Global Ratings lowered its rating 
to 'BB' from 'BBB' on the city's outstanding appropriation bonds and lease 
rental payment bonds. The outlook is stable. 

The rating action reflects the city's intention to move forward with a roughly 
$58 million financing for an arena project. The city is issuing both GO 
supported debt and GO annual appropriation debt to support the project. Most 
of this, about $41 million, is to be funded with bank loans on a variable rate 
basis. We have examined the preliminary loan documents, and we note there are 
no remedies under the events of default section allowing for acceleration of 
the city's payments to the bank. The interest on the bank loans is fixed for 
five years, but resets on the fifth year. There is no maximum interest rate, 
which in our view exposes the city to interest rate risk. 

"The lowered rating reflects our view of the city's heightened debt burden 
with very high fixed costs, its exposure to high interest rates on its bank 
loans, and weakened financial flexibility and performance as the city moves 
forward with its plans to construct a major economic development project 
centered on an arena," said S&P Global Ratings credit analyst Helen Samuelson. 
"We do not anticipate that the pressure from all of this debt will abate, and 
it could be challenging through multiple economic cycles," Ms. Samuelson 
added.

We note that in the various documents with Great Western Bank's portion of the 
transaction show that the city has assigned as collateral elements of the 
project and land as security for repayment on the debt associated with the 
project. 

The 'BB+' ICR reflects our view of the city's:
  • Very weak debt and contingent liability position, with debt service carrying charges at 44.1% of expenditures and net direct debt that is 709.9% of total governmental fund revenue, as well as high overall net debt at greater than 15% of market value;
  • Weak management, despite "standard" financial policies and practices under our Financial Management Assessment methodology;
  • Adequate budgetary performance, with operating results that we expect could deteriorate in the near term relative to fiscal 2017, which closed with operating surpluses in the general fund and at the total governmental fund level; and
  • Adequate current liquidity, that could erode rapidly should the multiple economic development projects not come to fruition.
Slightly off-setting these credit weaknesses are: 
  • A strong economy, with market value per capita of $120,488 and projected per capita effective buying income at 138% of the national level;
  • Strong budgetary flexibility, with an available fund balance in fiscal 2017 of 45% of operating expenditures, but limited capacity to reduce expenditures and limited capacity to raise revenues due to consistent and ongoing political resistance; and
  • A strong institutional framework score.
The city, with an estimated population of 21,270, is located in Johnson 
County, directly northwest of Iowa City, which is home to the University of 
Iowa. Residents also have access to employment opportunities in Cedar Rapids, 
located approximately 30 miles to the north.

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